The wave of orders for wide-body aircraft has slowed to a trickle in 2016. Why has this happened, and when will the market turn around? There are a number of reasons that order books have not been particularly robust in 2016, including low fuel prices that keep older aircraft economically viable, a lack of economic growth in North America and Western Europe, and a slowing of growth rates in China and Asian from phenomenal to normal levels.
How have wide-body orders and deliveries fared in recent years? Orders have outpaced deliveries by a considerable margin, as airlines ordered new technology 787 and A350 aircraft in record numbers. The chart below shows net orders (including cancellations) and deliveries by year from 2000 through the second quarter of 2016. While orders have jumped considerably, production has not kept the same pace.
Looking at this differently, again starting in 2000, the growth in wide-body backlog has been quite significant, as shown in the following chart. Note that the existing backlog in 2000 has not been included, only growth in the new millennium.
With the promise of more efficiency, orders for the 787 and A350 skyrocketed as airlines lined up for more fuel efficient aircraft. Even with deliveries at about 400 wide-bodies per year, the backlog is about 6.5 years’ worth of aircraft.
Let’s examine some of the events that have muted demand and new orders. The first drop comes in 2002, right after 9/11 and the ensuing slowdown in travel. The next drop comes in 2009, following the recession that began in 2008. But more recently, we’ve seen orders fall below deliveries in 2012 and in 2015 and 2016. The 2012 drop is likely the result of some 787 cancellations after the grounding of the aircraft, while the drop in 2015 and 2016 reflects the impact of lower fuel prices.
With lower fuel prices apparently here to stay for the foreseeable future, as new capacity provides a cap on OPEC’s ability to price, will there be a dampening of orders as older aircraft remain in service longer? We’ve already seen several major carriers push out wide-body deliveries this year, including Delta and American deferring new wide-body aircraft, and even Southwest deferring narrow-bodies. When older aircraft, without the substantial capital cost of a new aircraft, can turn a higher profit during a period of low fuel prices, pushing back deliveries is a financially sound option. While older aircraft will incur higher maintenance costs as they age, there are a few more years of life that can be profitably squeezed out of them as long as fuel costs remain low.
Of course, airlines can’t defer new aircraft forever (even Delta), but they can forego new orders until they absorb the currently scheduled additions to their fleets. This can also put a damper on increased production rates planned by OEMs.
The increase in backlog for wide-body aircraft has been quite dramatic, and levels have remained high for a decade. But an adjustment may be underway, and we may see a couple more years of minimal orders for wide-body aircraft as airlines realize that they don’t need to order aircraft and pay deposits for deliveries 7-8 years in advance, but can wait until the traditional 3-4 years out that was commonplace before the feeding frenzy for new technology aircraft took place. Lower fuel prices have removed the imperative to quickly get in line for delivery positions.
Long-term, the fleet will double every 15 years at current global growth rates, and we will see significant growth in wide-body production. The questions are how quickly the industry can absorb the existing backlog, and how soon Boeing and Airbus will need to move their newest aircraft to higher monthly production rates?
The supply chain wants assurance that new production rates are sustainable. With the current economic malaise and low growth in the Western economies, and a slowing of growth in China and Far Eastern economies, lower order numbers don’t provide that assurance. We’ve entered a down cycle, and can expect a couple more down years. But we must remember this is a cyclical industry, and that orders will rise again for wide bodies as we reach the end of the decade.